Flash Orders Not Used by Institutional Brokers
Traders Magazine Online News, August 3, 2009
Even before flash orders produced a hailstorm of controversy in Congress and the media, institutional broker-dealers were avoiding these order types.
"We don't flash," said Dan Mathisson, head of the Advanced Execution Services group at Credit Suisse. "The whole reason we exist is to try to execute [institutional orders] while leaking the smallest possible amount of information. Flashing orders is not consistent with that overall strategy." Credit Suisse said it does not send routable orders from its AES unit to market centers, and therefore doesn't use flash orders.
Greg Tusar, head of U.S. electronic transaction at Goldman Sachs Execution & Clearing, said his firm does not use flash orders from any of the four venues that offer them. "We don't use them in the execution of client orders," Tusar said. "But we believe it should be a matter of choice--that clients should have access to them if they choose to. They should be available on an opt-in basis, client by client."
"Flash orders have the potential to cause information leakage," said Jatin Suryawanshi, head of global quantitative strategies at Jefferies & Company. "It's information that was not available on a data feed that's now available on a data feed." He added that the use of flash orders, if it's not done purposefully to aggressively take liquidity, may fly in the face of a broker's best-execution duties.
Flash orders are marketable orders about to be routed by a market center to a venue quoting at the best price. (Cancellable flash orders seek liquidity or price improvement in that particular market center and are not routed out if there's no response.) Information about the order is flashed to a group of broker-dealers or displayed on a proprietary data feed available to anyone who receives the feed, typically for less than 30 milliseconds. Firms that want to step up and execute that order at the industry's best price or better can respond to the flashes.
Suryawanshi noted that those benefiting the most from flash orders are the exchanges and ECNs offering them, "because they're getting more done within their boundaries." If those orders aren't flashed, they would be routed elsewhere for execution.
The discussion about whether flash orders should continue to be allowed, and whether they raise regulatory concerns by creating a system in which some market participants can access information about flashed orders that others cannot see, has led to speculation that the Securities and Exchange Commission could eventually nix these order types. The SEC is already looking at broader issues involving the potential impact of non-displayed liquidity on market quality and price discovery.
Now, the SEC has roped flash orders into that review. "This review includes looking into flash orders by exchanges and automatic trading systems that disseminate information to select market participants, potentially disadvantaging other investors," SEC spokesman John Nester told Traders Magazine last week. "The SEC staff is specifically examining flash orders to ensure best execution and fair access to information for all investors."
Flash orders gained industry attention in the lead-up to their introduction in June by Nasdaq and BATS Exchange. Direct Edge and the CBOE Stock Exchange already offered order types that seek to keep marketable orders in-house by enabling broker-dealers to match or improve the best price available on another market. Ten days ago, following a spate of media criticism of flash orders, Senator Charles Schumer sent a letter to SEC Chairman Mary Schapiro, exhorting her to pull the plug on these order types.
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